Curb Your Enthusiasm

For millions of Argentines, the presidential election in October can’t arrive soon enough. Thanks to term limits, Cristina Fernández de Kirchner must step down, and almost any successor promises to be less controversial — and more interested in stabilizing the economy. But Argentina still won’t be out of the woods anytime soon. The economy is suffering from both the international slowdown and a series of self-inflicted wounds, including foreign exchange restrictions, a debt default, recession, and skyrocketing inflation rates. Whoever wins the election — and its result is far from certain — will face some intimidating challenges.

At the moment, the economy teeters on the edge of chaos. With few options left to stop the dollar drought and ease the rise in prices, the Fernández government intervened aggressively in foreign exchange markets over the past few months to prop up the peso, freezing the official exchange rate as an anchor against inflation. In the meantime, it camouflaged the extent of its foreign reserves losses by borrowing from China.

But just as the government was laying the groundwork to avoid economic problems that could harm its popularity in an election year, a political earthquake shook the foundations of the Kirchner era — that of Fernández and her late husband, former president Néstor Kirchner — drawing into question its much-touted democratic values. The mysterious death of federal prosecutor Alberto Nisman, who was preparing to bring charges against the president of attempting to cover up Iran’s involvement in the bombing of a Jewish community center in Buenos Aires in 1994, could have a major impact on the electoral campaign and bolster opposition candidates.

The extent of the political fallout from the Nisman investigation is still in question. But the impact is already being felt: The “silent march” held on Feb. 18 to honor the fallen jurist a month after his death brought out some 400,000 in Buenos Aires alone and many more around the country, suggesting that the Kirchnerists’ opponents will have a wealth of support in October. Foreign investors, reading the tea leaves in the streets and anticipating a change in government, have already begun investing capital, and are now are raising bullish bets on the economic changes they expect after the elections.

Against this backdrop, the Fernández government is staggering to the finish line. Its quick-fix solutions to shore up central bank reserves through monetary policy might be enough to avoid an economic crunch before the elections, but they will also transfer the balance-of-payments stress to the next president, on top of an already low stock of dollars.

And the burden doesn’t end there. According to private estimates, inflation is still rumbling along at an annual rate of 30 percent, and double the official forecasts, which have been questioned since 2007 — all this, even after the reforms carried out last year to prevent Argentina’s expulsion from the International Monetary Fund.

What’s more, Argentina’s currency problems are taking a toll on other aspects of the economy. Since late 2014, the central bank has allowed the peso to decline at an incremental pace. It did this out of fear that another large devaluation, like the one that occurred in January 2014, would further stoke inflation at a time when loose monetary policy in support of continued government spending has placed a severe strain on prices. Indeed, the fiscal deficit has already swelled to 5 percent of GDP. But holding the peso steady has imposed a heavy load on regional exporters, who are losing competitiveness and face additional challenges on the external front, due to the strengthening of the U.S. dollar and weak commodity prices.

As a result, Argentina is swimming against the tide, as its key trading partners are depreciating their currencies and maintaining far lower inflation levels. For the past six months, Brazil, where inflation is at 7 percent, has devalued its currency by 36 percent. Facing the prospect of deflation, the European Central Bank depreciated the euro by 20 percent. Meanwhile, the Argentine peso cheapened only 4.4 percent to 8.77 per dollar, although in the black market the greenback’s rate is fixed below 13 per dollar amidst strict governmental monitoring of underground transactions.

Due to the dollar shortage and its consequences, including import restrictions, GDP is expected to shrink by about 1.3 percent this year, according to the IMF. Import and tourism constraints have taken a toll on consumption and investment with delays in allocations of dollars to importers to the tune of at least $5 billion, reducing imports in sensitive sectors of the economy.

Rather than deal with the root causes of the problem, such as rampant public spending and restriction of trade, Fernández prefers to deal with the symptoms. Argentina is locked out of the international debt markets due to ongoing litigation in U.S. courts with a group of holdout creditors led by millionaire Paul Singer. So now the government’s strategy is to fight tooth and nail to stem the bleeding of international reserves as it continues to prioritize debt obligations over domestic liabilities, since central bank reserves are the government’s only way of paying foreign debt as long as Argentina remains in default.

The central bank’s dollars total $31.3 billion, but reserves are at precariously low levels, given the rising costs of servicing external debts. Net reserves are only at $16 billion, while the public and private debt burden is at $12.7 billion this year, according to Finsoport, an Argentinean consultancy.

Luckily for the government, it managed to survive the greenback dry spell without having to settle with the holdouts. The central bank reached an agreement for a currency swap line with China last June for at least $11 billion, of which it has received $3.1 billion so far for near-term financing. In addition, economists are expecting a new sovereign issuance in the near future to replace the one held last December, which sold less than 10 percent of the $3 billion. Yet given the selective default in which Argentina is immersed, implementing this plan won’t be that easy: The holdouts may crinkle the government’s attempts to finance itself in dollars, restricting the efforts to do so by domestic bond sales. The country needs more money to help pay down more than $6 billion in debt maturing this year.

As for the presidential campaign, the persistence of the political convulsion could continue to tarnish the already unpopular president and hurt her heir-apparent, Daniel Scioli, who voters may deem guilty by association. Before serving two terms as governor of Buenos Aires province, he was vice president under Néstor Kirchner. In fact, a poll from Management & Fit, an Argentine consulting firm, shows that in the wake of Nisman’s death, Kirchner’s approval ratings fell 5 points to 29.8 percent, while her unfavorability rating climbed to 63.5 percent. In line with the president’s gloomy outlook, Scioli’s approval ratings lost 4 percent, sinking him to 23 percent and pushing him out of the top of the polls.

This may leave the strongest opposition candidates, Mauricio Macri, who is the mayor of the city of Buenos Aires, and Sergio Massa, the former cabinet chief under Fernández, with a greater chance of victory. Macri, a long-time Fernández critic and the one with the fewest Peronist ties, looks particularly well-placed to benefit: As a result of the political turmoil, he has gained what Scioli lost, and now leads the polls, with a 28 percent approval rating. In third place remains Massa, at 19 percent.

Thanks to Argentina’s run-off electoral system, any of the three candidates could win. Bondholders seem to favor Macri, who they foresee making the most radical changes in the economy. Truth be told, the entire slate of contenders represents a shift from the current distorted economic policy management. All have promised to leave behind economic isolation and market intervention. And while it is not clear how they will do it, market expectations are that any of them will cure the default.

By the same token, investors assume and foresee change after the elections, and a positive credit shock in the near future. This may explain why, despite the deteriorating economy, the market’s confidence has been reflected in the rally that sovereign bonds have experienced in the past few months. Despite being in default, some asset prices have already reached record highs.

The problem is that any post-election fillip may not be enough to save Argentines from sacrifice. Resolving the default will undoubtedly help spur investment and create jobs. But whoever wins will have to puzzle out the macroeconomic imbalances, rip out the tangle of currency restrictions, unify the exchange rate, lower inflation, lift imports — and still restore growth. Markets are betting that a period of austerity — instituted either out of necessity or conviction – might well accompany these measures.
GOH CHAI HIN / AFP